I have a veritable library of financial articles and it is quite amusing to look back at what was written years, months and even just a few days ago. One I have been sitting on is from The Telegraph dated last November and asks ‘What about annuity rip–offs, minister?’.
The speed with which events outside our control can impact upon us is sometimes quite breathtaking and often they are to our disadvantage. Events such as the Russian annexing of Crimea can have a sudden and dramatic impact upon global economies and, consequently, our pensions and investments. It is nigh on impossible to predict such an action as it was the oil spill a few years ago that adversely affected the share price of BP.
However, the positive decision by the Chancellor to change the pension rules and waive the obligation to purchase an annuity is, indeed, most welcome. It doesn’t mean that you shouldn’t buy an annuity; it’s just that you have the choice as to whether you do or not.
An annuity pays an income for life, either level or increasing, but the amount is dependent upon a number of factors, not least of which is gilt yields, which are historically low, and life expectancy, which is longer than ever. These factors combine to mean that insurance companies are paying ever decreasing incomes to pensioners in return for their accumulated pension fund. Annuities can be useful in some circumstances but for many it would be better to leave their pension fund invested and continuing to grow.
New rules allowing for a more liberal pensions drawdown regime will come in from next year following consultation, with interim rules allowing for more income for those wishing to take it now. While the headlines concentrated on individuals squandering their hard saved pension pots on a Lamborghini, the much less publicised proposed change to reduce the tax payable on second death under drawdown from 55% to basic rate was overlooked by many. The change makes death benefit planning and generational drawdown, that is passing funds down to your children, a real alternative when compared to an annuity.
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